Bybit Options Lesson: What Are Options?

Key Takeaways:

• Options are a form of derivatives that give traders the right to buy or sell an underlying asset at a predetermined price and date. 

• Buyers have to pay a premium for a call or put option for the rights to the contract.

• Crypto options have gained popularity because they don’t require substantial capital to get started and can potentially generate higher percentage returns.

Options contracts are derivatives, meaning they're tied to an underlying asset such as a stock, a commodity or a cryptocurrency. Essentially, an options contract gives you the right to buy or sell an asset at a specific price within a given time frame or at a particular expiration date, depending upon the type of contract you choose.

Options are built upon the foundation of an agreed-upon price (known as the strike price) at which the buyer will gain long or short exposure to the underlying asset, and they have a predetermined date at which they expire (expiration date).

There are two types of options: call options (calls) and put options (puts).

→ A call option gives the buyer or seller long or short exposure above the strike price, respectively.

→ A put option gives the buyer or seller short or long exposure below the strike price, respectively.

As puts and calls are highly versatile, you can use them on their own or combine them to create complex options strategies. Ultimately, the end goal for all strategies is the same — to profit from market conditions.

The option buyer (sometimes called the holder) always pays a fee (option premium) to the seller (or writer). This amount indicates the maximum amount of money the buyer can lose — and the most the seller can profit — from the particular trade.

When trading options, there are three ways to describe a strike price:

• At-the-money (ATM): The underlying asset’s price is the same as the strike price.

• In-the-money (ITM): The strike price is in a favorable position to the underlying asset. A call option is ITM when it's below the underlying, and a put option is ITM when it's above the underlying.

• Out-of-the-money (OTM): The strike is in an unfavorable position to the underlying asset. A call option is OTM above the underlying; a put option, below the underlying.

Understanding Crypto Options Trading

Crypto options trading is used to describe options contracts designed specifically for cryptocurrencies. Like stock options, crypto options are becoming more popular among retail traders who turn to options as a hedging instrument amid the bear market. Fundamentally, crypto options share the same characteristics as stock options. However, they come with many more advantages.

Unlike stock options, crypto options don’t require you to buy or sell the underlying asset if an option expires ITM. Instead, your trading account will receive a credit or debit equal to the cash difference between the strike price and the option's settlement price.

By removing the hassle of physical ownership, you can focus on what's truly important — making money.

Summary

Crypto trading isn’t an overnight get-rich scheme. It requires patience and consistent practice to truly understand how the market reacts. Options trading is a great avenue to hedge against volatility, but it isn’t foolproof. Always do your research and exercise proper risk management to minimize your exposure. 

Read more: 

• Crypto Options: Why They Deserve a Place in Your Portfolio

• What Are Bitcoin Options: How to Own The World’s No. 1 Crypto for Less